INVESTMENT PROPERTIES

Question 1

What is an investment property?

Answer 1

Property (land or building or part of a building or both) held by the owner to earn rentals or capital appreciation or both.

Question 2

Why is the difference between investment property and normal assets important?

Answer 2

Business has assets which it uses in the business.
Such assets will be depreciated.
Investments, are no an integral part of an enterprises activities.
An investment is held to earn positive returns in the form of interest, dividends or rent, or through capital appreciation.
An investment is not normally “consumed” whilst delivering its returns. The main issue is the investments’ positive or negative changes in value.
Depreciation, therefore, would not appear to be appropriate or indeed necessary,.
In terms of an asset, such as property, held for its investment potential should the asset be subject to a depreciation charge?
Or should such an asset be accounted for in a different way?

Question 3

IAS 40 INVESTMENT PROPERTY

Answer 3

The need for a standard arises from the specific problem with properties in that they can be held for either usage or investment purposes or for both purposes at different times.
An investment property will generate cash flows “largely independently” of other assets held by an enterprise.
It is this which distinguishes an investment property from that occupied by the owner.

Question 4

EXAMPLES OF INVESTMENT PROPERTY

Answer 4

Land held for long-term capital appreciation.
Land held for undecided future use.
Building leased out under an operating lease.
Vacant building held to be leased out under an operating lease.
Property that is being constructed or developed for future use as an investment property.

Question 5

EXAMPLES OF NON INVESTMENT PROPERTY

Answer 5

Property held for use in the production or supply of goods or services or for administrative purposes.
Property held for sale in the ordinary course of business or in the process of construction or development.
Owner occupied property.
In some cases, judgement may be required in distinguishing investment properties from owner-occupied properties.

Question 6

PARTIAL OWN USE PROPERTY

Answer 6

Part of a property may be rented out to earn income.

The part rented is an investment property if the owner occupied portion (i.e. the portion used for non-investment purposes) is insignificant.

If the two parts can be sold or leased separately then account from them separately.

Question 7

When does a partial own use property qualify as an investment property?

Answer 7

What if the owner provides services?
Only qualifies as an investment property IF
- Service provided is an insignificant part of the arrangement.
-Security and maintenance service are held to be insignificant (so don’t affect status).

Question 8

Is a hotel an investment property?

Answer 8

A hotel is a property held for the purpose of renting out rooms and gaining rental income - so from this point of view seems to fit with the definition of IP.
What about the services provided?
Are they insignificant?
IAS 40 says no - so as the services are not insignificant, cannot treat a hotel as an investment property.,

Question 9

What if the property is leased with assets?

Answer 9

Sometimes building and “other assets” are leased out together under a single contract to earn revenues.
Contradiction in the standard:
Para 5
Suggests that “other assets” should not be included in the value of investment property.
BUT
para 50 says:
a) equipment such as lifts or air condition is often an integral part of a building and is generally included in the fair value of the investment property, rather than recognised separately as property, plant and equipment.
b) If an office is leased on a furnished basis the fair value of the office generally includes the fair value of the furniture (so furniture no a separate asset).

Question 10

WHAT IF ASSETS ARE LEASED OUT TOGETHER?

Answer 10

Issue is whether or not “other assets” are integral and form part of the value of the investment property.
This implies these “other assets” are necessary for the land and buildings to be used in the way intended.
AND
Form part of the lease agreement.

Question 11

How is a decision made on whether other assets are included as part of lease?

Answer 11

The following conditions should be present:
Land and buildings should be dominant asset.
“Other assets are leased together with land and buildings as one whole contract.
Income is generated from the entire group of assets.

Question 12

When is an investment property recognised?

Answer 12

An investment property within the definition should be recognised as an asset when:
It is probable that the future economic benefits that are associated with the property will flow to the enterprise; and
The cost of the investment property can be reliably measured.

Question 13

How is investment property initially measured?

Answer 13

At cost including directly attributable expenditure such as professional fees for legal services and property transfer taxes.

Question 14

How is subsequent expenditure on investment property recognised?

Answer 14

Should be recognised as an expense when incurred, except where:
There is a chance that this expenditure will enable the asset to generate future economic benefits (in excess of its originally assessed standard of performance)
The expenditure can be measured and attributed to the asset reliably.

Question 15

What methods does IAS 40 allow enterprises to choose between for measurement of investment property?

Answer 15

A fair value model
A cost model

An enterprise must apply the model chosen for all of its investment property.
A change from one model to the other is only permitted if this will result in a more appropriate presentation.
However, IAS 40 notes that this is highly unlikely to be the case for a change from the fair value model to the cost model.

Question 16

FAIR VALUE MODEL

Answer 16

Fair value is the amount for which the property could be exchanged between knowledgeable willing parties.
Fair value should reflect the actual market state and circumstances at the balance sheet date.
Investment property should be measured at fair value and changes in fair value should be recognised in the income statement.
The standard makes it absolutely explicit that changes in fair value are to be taken directly to earnings and not taken to or from reserves.
It is presumed that company will be able to determine the fair value of an investment property reliably on a continuing basis.
However, if this is impossible, the property should be accounted for using the cost model.
A consequence of the fair value model i that no depreciation is charged.

Question 17

COST MODEL

Answer 17

If the cost model is chosen, then all investment property is measured at cost less accumulated depreciation.
Note IAS 40 if cost model is chosen , then the fair value of its investment properties must be disclosed in the notes to accounts.
Fair value, therefore, has to be determined in all cases.

Question 18

Why allow a choice between fair value model and cost model?

Answer 18

Choice was initially included to allow:
-Preparers and users time to get used to fair value method.
-Countries with less developed property markets and valuation professions time to mature.
Considered removing choice, however IASB decided more time needed for these two objectives to be achieved.
Many other standard setters allow the cost model so choice was kept in the interest of convergence.

Question 19

What disclosure is required for both models?

Answer 19

The choice of model used.
Criteria to distinguish investment property from, owner-occupied property and from property held for sale.
Methods and significant assumptions applied in determining the fair value of investment property.
Extent to which the fair value of investment property is based on a valuation by a qualified independent valuer; if there has been no such valuation, that fact must be disclosed.
Amounts recognised in statement of income for : rental income from investment property.
Direct operating expenses (incl. repairs and maintenance) arising from investment property that generated rental income during the period.
Cumulative change in fair value recognised in profit or loss on sale from a pool of assets in which the cost model is used into a pool in which the fair value model is used.
Restrictions on the realisability of investment property or the remittance of income and proceeds of disposal.
Contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or enhancements.
Reconciliation between carry amounts of investment property at the beginning and end of the period, showing additions, disposals, fair value adjustments, net foreign exchange differences, transfers to and from inventories and owner occupied property, and other changes.

Question 20

What are the additional disclosures required for fair value model?

Answer 20

Whether property interests held under operating leases are classified and accounted for as investment property.
Additional disclosures where an entity that otherwise uses the fair value model measures an item of investment property using the cost model.

Question 21

What additional disclosures are required for the cost model?

Answer 21

Depreciation method used.
Useful lives or the depreciation rates used.
Gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period.
The fair value of investment property.
Additional disclosure where the fair value of an investment property cannot be measure reliably, including, if possible, the range of estimates within which fair value is highly likely to lie.